Fed Preview | May Meeting 2024

According to the CME Group’s FedWatch tools, there is no doubt that the Fed will maintain the benchmark overnight interest rate at its current level. Fed speakers have consistently confirmed this stance in recent weeks. However, during Powell’s press conference half an hour later, investors and market participants will be keen to learn about the Fed officials’ outlook on inflation progress and the potential timeline for the Fed’s interest rate cut plan.

 

In his speech on April 16, Fed Chair Powell stated, “The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.” He further added, “Given the strength of the labor market and the progress on inflation so far, it’s appropriate to allow restrictive policy more time to work.”

 

While just a few months ago, the Fed was bragging about its ability to reduce inflation without a recession, the current strong economy poses a significant challenge in itself. With a strong economy, acceptable earnings reports, and a resilient labor market, it is increasingly difficult to expect inflation to decrease further.

 

According to the US Labor Department’s Non-Farm Payrolls (NFP) report on April 5, the US economy added more than 300,000 new jobs in March, surpassing all estimates. This positive job market momentum reduced the unemployment rate to 3.8%, while the labor participation rate increased to 62.7%. Additionally, wages rose by 4.1% compared to the previous year and by 0.3% compared to February.

 

On the inflation front, the Commerce Department recently reported a consumer price index of 3.5% year-over-year in March, up from the 3.2% gain observed in February. The Core CPI, which excludes volatile energy and food prices, increased by 3.8% from the previous year. Furthermore, the Core PCE Price Index, the Fed’s preferred inflation measure, rose by 0.3% in March, halting the decline seen in previous months and stabilizing at an annual rate of 2.8%.

 

Despite inflation reaching challenging levels during its reduction process, the labor market remains strong. However, there are other concerning indicators, such as the Leading Economic Index (LEI), CB Consumer Confidence, and Manufacturing PMI, which could potentially lead the Fed to consider rate reductions sometime in 2024. For now, it’s a matter of timing.

 

With no economic outlook or dot plots in this session, market reactions will likely depend on Fed Chair Powell's remarks and press conference, as decisions are widely anticipated. Given these estimates, we expect the US dollar to hold on to its gains, while equity markets may react with deeper volatility.